A North Korean flag flutters in the wind in the propaganda village of Gijungdong near the truce village of Panmunjom, in the demilitarized zone separating the two Koreas, about 55 km north of Seoul in this May 21, 2008 file photo.

SEOUL (Reuters) - South Korea's human rights agency on Tuesday set up a committee to look at abuses in the communist North in a move likely to chill ties between the neighbours.

Relations between the states technically still at war have frayed since February when conservative President Lee Myung-bak took office pledging to get tough with Pyongyang. The North later responded by threatening cut off all contacts and reduce the South to ashes.

"The National Human Rights Commission has formed a special committee on North Korean human rights in a bid to bolster the ability to deal with North Korean human right issues," it said in a statement.

Under liberal presidents over the past 10 years, South Korea has walked on egg shells when it came to human rights, feeling that open criticism of its communist neighbour would derail their plans to draw the North closer through engagement.

But conservatives, who argue human rights represent universal values, have said pressing North Korea now cannot harm a relationship that has severely soured.

Last week, South Korea said it has for the first time joined the sponsors of a U.N. resolution criticising North Korea for its suspected human rights abuses.

Conservative MPs, who hold a majority in parliament, are planning their first piece of legislation that would call on the North to improve its rights record and fund efforts to bring back the about 1,000 South Koreans held in the hermit state.

Human rights groups and governments such as the United States and Japan say North Korea punishes dissent with a network of political prison camps, where torture is common.

They say it uses public execution as a tool of intimidation and guilt by association by throwing family members of those who run afoul of the state into jail.

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